Weak rand blamed for South Africa inflation surge

Weakness in the rand helped drive South African inflation to 6.6 percent in May, official statistics showed Wednesday (18/06/2014), prompting the central bank to predict consumer prices will rise sharply over the next two years.

South Africa's central bank has set an inflation target of 3.0-6.0 percent, but the national statistics office said that in the 12 months to the end of May, it reached 6.6 percent.

That's an acceleration from the 6.1 percent rise recorded in April, and prompted the bank to warn prices are likely to increase faster than it wants until 2016.

"Inflationary pressures have intensified in recent months," the bank said in its quarterly bulletin.

The rise in inflation comes as South Africa's economy has started to flag, with the longest mining strike in the country's history pushing it into contraction for the first time in five years in the first quarter.

Last month the central bank reduced its 2014 growth forecast from 2.6 percent to 2.1 percent.

A slump in the rand alongside other emerging economy currencies earlier this year has also pushed up the cost of importing goods from other countries and further threatened growth.

Much of the recent increase in inflation has been driven by an 8.8 percent increase in the price of food since May 2013.

In May alone, consumer prices rose by 0.2 percent. The cost of transport fell, mainly because petrol prices eased, but over 12 months transport prices jumped 8.9 percent and the price of petrol jumped 14.3 percent.

"Inflation breached the upper limit of the inflation target range in April 2014 as petrol and food price inflation quickened notably, coupled with the lagged emergence of broader exchange rate pass-through," the bank said.

The central bank now expects inflation this year and next to hold at 6.1 percent, before easing to 5.9 percent in 2016.

This reflected potentially higher food prices "and the possibility of an acceleration in underlying inflationary pressures due to a broadening in exchange rate pass-through," it said.

"The currency remains vulnerable to international developments", strikes and electricity shortages, the bank added.

Earlier this month Fitch ratings agency revised its outlook on South Africa to negative from stable, citing the country's deteriorating growth outlook.

The agency said that the government "faces a challenging task to raise the country's growth rate and improve social conditions, which has been made more difficult by the weaker growth performance and deteriorating trends in governance and corruption". - AFP